Listed telecoms operator Safaricom has independently been proved to be a dominant operator on the basis of its high and enduring market shares, high barriers to entry and customer lock-in. These are some of the findings from a study commissioned by the Communications Commission of Kenya (CCK), the industry regulator and released at stakeholder’s workshop in Nairobi yesterday. Titled Competitive assessment and contribution to GDP of the Telecoms sector in Kenya, the study was conducted by PriceWaterHouseCoopers London. The release of the findings comes hot on the heels of an escalating mobile price war ignited by Zain.
The study was motivated by the fact that regulation is a key influence shaping the structure, conduct and overall performance of the Kenyan telecoms market, which is among the most important economic sectors. Notably, a vibrant telecoms sector is critical to the economic and social development of Kenya. The study was also motivated by the fact that competition is the most vital and effective process for generating good market outcomes while encouragement of investment is crucial to growth and competition, etc.
According to the findings, Safaricom has a Significant Market Power (SMP) in the retail mobile voice market. The researchers further found that Safaricom engages in on-net/off-net differentiation, which it uses to further entrench its high market share and dominance, to the detriment of competition and consumers. The study notes that on-net/off-net price differentials are a strategic device which lead to customer lock-in due to network/clubbing effects. Subscribers will prefer to stay with/join the larger network, in order to take advantage of relatively low on-net prices as compared with the off-net prices of entrants.
A further and equally important associated barrier to entry is that Safaricom’s high off-net prices to call a small network tends to reduce the small networks’ incoming call volumes, which will reduce the value of being on the small network, given that subscribers derive value from receiving calls. This reinforces the position of Safaricom in the retail market, through raising barriers to churn, limitations of consumer choice, undermining replicability of offers by competitors.
In response to Safaricom’s low on-net/high off-net offers, in order to attract new subscribers, new entrants are forced to lower their off-net prices (e.g. to the same level as the large networks’ on-net prices. This has resulted in new entrant subscribers making greater volumes/duration of calls to Safaricom subscribers than vice versa. This has led to a traffic and payment imbalance. These net payments represent large financial transfers from small networks to Safaricom and further distorts playing field.
The researchers’ proposed remedies on Safaricom directly address its practice of on-net/off-net differentiation including the retention of price floor on on-net prices. This could be in the form of a ‘no margin squeeze rule’. This reduces the ability to set high off-net charges and also allows greater pricing flexibility for entrants, thereby alleviating net payments issue.
Other recommendations are that Safaricom’s off-net price is not to exceed a certain percentage above its on-net price. In combination, these measures are likely to lessen the incentive and ability of Safaricom to set un-competitive pricing structures, thus benefiting competition in the retail mobile market.
In his address to the stakeholders, CCK Director General Charles Njoroge said the ultimate desire of the commission is to see that the sector creates value for all its stakeholders.
“We wish to see the consumer enjoying greater choice and better services, the service providers declaring good returns on their investments and the exchequer getting its rightful share in levies. It is only the promotion of effective competition that would make all this possible and the commission is obligated to ensure this happens”, said Njoroge.
The DG said a competitive market has the capability of generating the best socio-economic outcomes. The commission would therefore not only want to improve the competitive framework but equally nurture a progressive regulatory environment for the telecommunications market in Kenya.
“We are therefore positive that the study and associated findings will provide the necessary guidance on remedial measures that can be adopted to deal with market inefficiencies”, said Njoroge.
Alex Gakuru, chair, Kenya ICT Consumers Association urged the regulator to speedily
implement the findings of the report to protect all telecommunications investors - the biggest being consumers, and to enable them enjoy affordable all-round communication from mobile voice to internet costs.
On the sector’s contribution to GDP, the researchers calculated this using the Gross Value Added (GVA) method, applied to data received from the operators. The Kenya National Bureau of Statistics (KNBS) currently calculates telecoms share of GDP within the broader sector of Post and Telecommunications. In 2008, the share of GDP for this sector was calculated as 2.8 per cent.
CCK was interested in understanding whether the methodology applied by the KNBS obtains a comprehensive picture of the telecoms sector’s contribution to Kenyan GDP, particularly whether it may understate it due to an overly narrow capture of the telecoms sector. But using the GVA method, and based on the analysis of the sample data, the researchers estimated that the telecommunications sector directly contributes 3.2 per cent to Kenyan GDP in 2008.
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